Dictionary

  • Solvency

    The ability to pay one’s debts in full from one’s own money when they fall due.

    Section 95A of the Corporations Act 2001 (Cth) defines solvency as follows:

    1. A person (including a company) is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
    2. A person who is not solvent is insolvent.

    At common law, the test for solvency is the cash-flow test which assesses the ability of a company to pay its debts (or sell its assets fast enough to pay its debts) as they become due and payable. The cash flow test requires an analysis of:

    • The company’s existing debts;
    • Whether the company’s debts are payable in the near future;
    • The date each debt will be due for payment;
    • The company’s present and expected cash resources; and
    • The dates any company income will be received.

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